Overseas investments in Joint Ventures (JV) and Wholly Owned Subsidiaries (WOS) have been recognised as important avenues for promoting global business by Indian entrepreneurs. Joint ventures are perceived as a medium of economic co-operation between India and other countries. Transfer of technology and skill, sharing of results of R&D, access to wider global market, promotion of brand image, generation of employment and utilisation of raw materials available in India and in the host country are other significant benefits arising out of such overseas investments. They are also important drivers of foreign trade through increased exports of plant and machinery and goods from India and also a source of foreign exchange earnings by way of dividend earnings, royalty, technical know-how fee and other entitlements on such investments.

In keeping with the spirit of liberalisation, which has become the hallmark of economic policy in general, and Foreign Exchange regulations in particular, the Reserve Bank has been progressively relaxing its rules and simplifying the procedures both for current account as well as capital account transactions.

Section 6 of the Foreign Exchange Management Act provides powers to the Reserve Bank to specify, in consultation with the Central Government the classes of permissible Capital Account transactions and limits upto which exchange is admissible for such transactions. Section 6(3) of the aforesaid Act provides powers to the Reserve Bank to prohibit, restrict or regulate various transactions referred to in the sub-clauses of that sub-section, by making Regulations.

In exercise of the above powers, the Reserve Bank has in super session of earlier Notification No.FEMA19/RB-2000 dated 3rd May 2000 and amendments thereto, issued Foreign Exchange Management (Transfer or Issue of any Foreign Security) Regulations, 2004 vide Notification No. FEMA 120/RB-2004 dated July 7, 2004 (as amended vide Notification No. FEMA 132/2005-RB dated 31st March 2005, Notification No. FEMA 135/2005-RB dated 17^th May 2005, Notification No. FEMA 139/2005-RB dated 11^th August 2005 and Notification No. FEMA 150/2006-RB dated 21^st August 2006) (hereinafter referred to as ‘the Notification’). The Notification seeks to regulate acquisition and transfer of a foreign security by a person resident in India i.e. investment by Indian entities in overseas joint ventures and wholly owned subsidiaries as also investment by a person resident in India in shares and securities issued outside India.

Indian parties are prohibited from making investment in a foreign entity engaged in real estate (as defined in Reg 2(p) of FEMA120) or banking business.

In terms of Regulation 4 of the Notification, general permission has been granted to residents for purchase / acquisition of securities in the following manner:

1. out of funds held in RFC account; and
2. as bonus shares on existing holding of foreign currency shares.
3. when not permanently resident in India, out of their

foreign currency resources outside India.

In terms of Regulation 6 of the Notification, an Indian party has been permitted to make investment in overseas Joint Ventures (JV) / Wholly Owned Subsidiaries (WOS), as under:

-not exceeding 300 per cent of the net worth of the Indian party (corporates) as on the date of the last audited balance sheet.

-not exceeding 200 per cent of the net worth of the Indian party (registered partnership firms) as on the date of the last audited balance sheet.

This ceiling will not be applicable where the investment is made out of balances held in Exchange Earners' Foreign Currency account of the Indian party or out of funds raised through ADRs/GDRs. The Indian party should approach an Authorised Dealer Category - I bank with an application in Form ODI and prescribed enclosures / documents for effecting remittances towards such investments.

The above ceiling will include contribution to the capital of the overseas JV / WOS, loan granted to the JV / WOS, and 100 per cent of guarantees issued to or on behalf of the JV/WOS. Such investments are subject to the following conditions:

Investment in an overseas JV / WOS may be funded out of one or more of the following sources: -

1. drawal of foreign exchange from an AD Bank in India;

ii) capitalisation of exports;

1. swap of shares (valuation as mentioned in para B.1 (d) above);
2. utilisation of proceeds of External Commercial

Borrowings (ECBs) / Foreign Currency Convertible

Bonds (FCCBs);

1. in exchange of ADRs/GDRs issued in accordance with the scheme for issue of Foreign Currency Convertible Bonds and Ordinary Shares (through Depository Receipt Mechanism) Scheme, 1993, and the guidelines issued there under from time to time by the Central Government

vi) balances held in EEFC account of the Indian party; and

1. utilisation of proceeds of foreign currency funds

raised through ADR / GDR issues

In respect of (vi) and (vii) above, the ceiling of 300/200 per cent (as applicable), of net worth will not apply. However, in respect of investments in the financial sector, they will be subject to compliance of Regulation 7 of the Notification ibid, irrespective of the method of funding.

In terms of Regulation 7 of the Notification, an Indian party seeking to make investment in an entity engaged in the financial sector should also fulfill the following additional conditions:

1. be registered with the appropriate regulatory authority in India for

conducting the financial sector activities;

2. have earned net profit during the preceding three financial years from the financial services activities;
3. have obtained approval for investment in financial sector activities abroad from regulatory authorities concerned in India and abroad; and
4. have fulfilled the prudential norms relating to capital adequacy as prescribed by the regulatory authority concerned in India.

A step down subsidiary of JV / WOS investing in a financial services sector is also required to comply with the above conditions.

Listed Indian companies are permitted to invest abroad in companies, (a) listed on a recognized stock exchange and (b) which has the share holding of at least 10 per cent in an Indian company listed on a recognized stock exchange in India (as on 1st January of the year of the investment). They are also permitted to invest in rated bonds / fixed income securities of such companies. Such investments shall not exceed 35 per cent of the Indian company’s net worth as on the date of the latest audited balance sheet.

Resident individuals are permitted to invest in equity and in rated bonds / fixed income securities of overseas companies as permitted in terms of the limits and conditions specified under the Liberalised Remittance Scheme.

Mutual Funds are permitted to invest in ADRs / GDRs of the Indian and foreign companies, rated debt instruments, equity of listed overseas companies, ETFs and overseas mutual funds that make nominal investments (say, to the extent of 10 per cent of net asset value) in unlisted overseas securities, within an overall cap USD 4 billion. Domestic Venture Capital Funds registered with SEBI may invest in equity and equity linked instruments of off-shore Venture Capital Undertakings, subject to an overall limit of USD 500 million. Accordingly, Mutual Funds/ Venture Capital Funds desirous of availing of this facility may approach SEBI for necessary permission.

General permission is available to the above categories of investors for sale of securities so acquired.

Reserve Bank, would inter alia, take into account the following factors while considering such applications:

1. Prima facie viability of the JV / WOS outside India;
2. Contribution to external trade and other benefits which will accrue to India through such investment;
3. Financial position and business track record of the Indian party and the foreign entity;
4. Expertise and experience of the Indian party in the same or related line of activity of the JV / WOS outside India

With a view to enabling recognized star exporters with a proven track record and a consistently high export performance to reap the benefits of globalization and liberalization, proprietorship concerns and unregistered partnership firms are allowed to set up a JV / WOS outside India with prior approval of the Reserve Bank subject to satisfying certain eligibility criteria. An application in form ODI may be made to the Chief General Manager, Reserve Bank of India, Foreign Exchange Department, Overseas Investment Division, Central Office, Amar Building 3rd Floor, Fort, Mumbai 400 001, through the AD Banks. AD Banks may forward such investment proposals, with their comments and recommendations, to the Reserve Bank for consideration.

Investments by established proprietorship or unregistered partnership exporter firms will be subject to the following criteria:

i) The Partnership / Proprietorship firm is a DGFT recognized Star Export House (export exceeding Rs.15 crore) per annum.

ii) The AD bank is satisfied that the exporter is KYC (Know Your Customer) compliant, is engaged in the proposed business and has turnover as indicated.

iii) Exporter has proven track record i.e. export outstanding does not exceed 10 per cent of the average export realization of preceding three financial years.

iv) The exporter has not come under adverse notice of any Government agency like Enforcement Directorate, CBI and does not appear in the exporters' caution list of the Reserve Bank or in the list of defaulters to the banking system in India.

A JV / WOS set up by the Indian party as per the Regulations may diversify its activities / set up step down subsidiary / alter the shareholding pattern in the overseas entity (subject to compliance of Regulation 7 in the case of financial services sector companies) subject to the Indian party reporting to the AD Bank for onward reporting to the Reserve Bank, the details of such decisions taken by the JV / WOS within 30 days of the approval of those decisions by the competent authority concerned of such JV / WOS in terms of local laws of the host country, and, include the same in the Annual Performance Report (APR—Part III of ODI) required to be forwarded annually to the AD Bank.

An Indian party may remit earnest money deposit or issue a bid bond guarantee for acquisition of a foreign company through bidding and tender procedure and also make subsequent remittances through an AD Bank in accordance with the provisions of Regulation 14 of the Notification.

Indian parties may also disinvest without prior approval of the Reserve Bank, in the under noted categories:

1. in case where the JV / WOS is listed in the overseas stock exchange;
2. in cases where the Indian promoter company is listed on a stock exchange in India and has a net worth of not less than Rs.100 crore;

3. where the Indian promoter is an unlisted company

and the investment in overseas venture does not
exceed USD 10 million.

An Indian party may pledge the shares of JV / WOS to an AD Bank or a public financial institution in India for availing of any credit facility for itself or for the JV / WOS abroad in terms of Regulation 18 of the Notification. Indian Parties may also transfer by way of pledge, the shares held in overseas JV/WOS, to an overseas lender, provided the lender is regulated and supervised as a bank and the total financial commitments of the Indian Parties remain within the limit stipulated by Reserve Bank for overseas investments, from time to time.

Resident entities having overseas direct investments are permitted to hedge the exchange risk arising out of such investments. AD Banks may enter into forward / option contracts with resident entities who wish to hedge their overseas direct investments (in equity and loan), subject to verification of such exposure. Cancellation of such forward contracts may be permitted by AD – Category I banks and 50% of such cancelled contracts may be allowed to be rebooked.

If a hedge becomes naked in part or full owing to shrinking of the market value of the overseas direct investment, the hedge may continue to the original maturity. Rollovers on the due date are permitted upto the extent of market value as on that date.

General permission has been granted to a person resident in India who is an individual -

b) to acquire shares under Cashless Employees Stock Option Scheme issued by a company outside India, provided it does not involve any remittance from India; or

c) to acquire shares by way of inheritance from a person whether resident in or outside India;

d) to purchase equity shares offered by a foreign company under its ESOP Schemes if he is an employee, or, a director of an Indian office or branch of a foreign company, or, of a subsidiary in India of a foreign company, or, an Indian company in which foreign equity holding, either direct or through a holding company/Special Purpose Vehicle (SPV), is not less than 51 per cent. AD Banks are permitted to allow remittances for purchase of shares by eligible persons under this provision irrespective of the method of operationalisation of the scheme i.e where the shares under the scheme are offered directly by the issuing company or indirectly through a trust / a Special Purpose Vehicle (SPV) / step down subsidiary, provided (i) the company issuing the shares effectively, directly or indirectly, holds in the Indian company, whose employees / directors are being offered shares, not less than 51 per cent of its equity, (ii) the shares under the ESOP Scheme are offered by the issuing company globally on uniform basis, and (iii) An Annual Return (Annex A, Part II, item 11) is submitted by the Indian company to the Reserve Bank through the AD Bank giving details of remittances / beneficiaries /etc.

A person resident in India may transfer by way of sale the shares acquired as stated above provided that the proceeds thereof are repatriated immediately on receipt thereof and in any case not later than 90 days from the date of sale of such securities.

e) Foreign companies are permitted to repurchase the shares issued to residents in India under any ESOP Scheme provided (i) the shares were issued in accordance with the Rules / Regulations framed under Foreign Exchange Management Act, 1999, (ii) the shares are being repurchased in terms of the initial offer document and, (iii) An annual return is submitted through the AD Bank giving details of remittances / beneficiaries, etc.

The shares acquired by persons resident in India in accordance with the provisions of Foreign Exchange Management Act, 1999 or Rules or Regulations made thereunder are allowed to be pledged for obtaining credit facilities in India from an AD Bank / Public Financial Institution.

Residents are permitted to acquire a foreign security, if it represents –

a) qualification shares for becoming a director of a company outside India provided it does not exceed 1 per cent of the paid up capital of the overseas company and the consideration for the acquisition does not exceed USD 20,000/- in a calendar year;

b) rights shares provided that the rights shares are being issued by virtue of holding shares in accordance with the provisions of law for the time being in force;

c) purchase of shares of a JV / WOS abroad of the Indian promoter company by the employees/directors of Indian promoter company which is engaged in the field of software where the consideration for purchase does not exceed USD 10,000 or its equivalent per employee in a block of five calendar years; the shares so acquired do not exceed 5 per cent of the paid-up capital of the JV / WOS outside India; and after allotment of such shares, the percentage of shares held by the Indian promoter company, together with shares allotted to its employees is not less than the percentage of shares held by the Indian promoter company prior to such allotment;

d) purchase of foreign securities under ADR / GDR linked stock option schemes by resident employees of Indian companies in the knowledge based sectors, including working directors provided purchase consideration does not exceed USD 50,000 or its equivalent in a block of five calendar years.

As per the revised reporting system, all the earlier forms have been subsumed into one form viz. ODI, comprising of four parts:

Part I - which includes the following:
Section A – Details of the Indian Party
Section B – Details of Investment in New Project
Section C - Details of Investment in Existing Project
Section D – Funding for JV / WOS
Section E – Declaration by the Indian Party
Section F - Certificate by the Statutory Auditors of the Indian Party

Part II - Reporting of Remittances
Part III - Annual Performance Report (APR)
Part IV – Report on Closure / Disinvestment / Voluntary Liquidation / Winding up of JV / WOS.

A new system has also been introduced for reporting Closure / Disinvestment / Winding up / Voluntary Liquidation of the overseas JV / WOS under general permission (Part IV of form ODI). Reporting in the revised form ODI has come into effect from June 1, 2007. The form can also be downloaded from Reserve Bank’s website www.rbi.org.in. 

It is reiterated that the revised form is only a rationalisation of the reporting procedure and there is no change or dilution in the existing eligibility criteria / documentation / limits. Eventually, these reports will be received on line by Reserve Bank.

Accordingly, AD Category - I banks may take action as under:
a) In cases of Automatic Route – Parts I and II of form ODI should be submitted to The Chief General Manager, Reserve Bank of India, Foreign Exchange Department, Overseas Investment Division, Amar Bldg. 3rd floor, Sir P. M. Road, Fort, Mumbai 400001.

b) In case of Approval Route – Part I of form ODI, along with the supporting documents, is required to be submitted after scrutiny and with specific recommendations by the designated AD Category - I bank, at the address mentioned above. In case the proposal is approved, Part I will be returned by the Reserve Bank to the AD Category - I bank.  After effecting the remittance, the AD Category – I bank should resubmit the same to the Reserve Bank along with Part II of form ODI.

In cases where the investment is being made jointly by more than one Indian party, form ODI is required to be signed jointly by all the investing entities and submitted to the designated branch of the AD bank. AD banks should forward to the Reserve Bank a consolidated form ODI indicating details of each party. The same procedure should be followed where the investment is made out of the proceeds of ADR / GDR issues of an Indian party in terms of Regulation 6(5) of the Notification. The Reserve Bank would allot only one Unique Identification number to the overseas project.

(ii) Clause (v) of sub-regulation (2) of Regulation 6 provides that all transactions relating to investment in a JV / WOS are to be routed through only one designated branch of an AD bank designated by the Indian party. For proper follow-up, the AD bank is required to maintain party-wise record in respect of each JV / WOS separately.

On receipt of the form ODI from the AD Bank, the Reserve Bank will allot a unique identification number to each JV or WOS abroad, which is required to be quoted in all correspondences with the Reserve Bank. AD Banks may allow additional investment in an existing overseas concern set up by an Indian party, in terms of Regulation 6 only after the Reserve Bank has allotted necessary identification number to the overseas project.

In the case of investment by way of share swap, AD Banks are additionally required to submit to the Reserve Bank the details of transactions such as number of shares received / allotted, premium paid / received, brokerage paid / received etc., and also confirmation to the effect that the inward leg of transaction has been approved by FIPB and the valuation has been done as per laid-down procedure and that the overseas company’s shares are issued / transferred in the name of the Indian investing company. AD Bank may also obtain an undertaking from the applicants to the effect that future sale / transfer of shares so acquired by Non-Residents in the Indian company shall be in accordance with the provisions of Notification No. FEMA 20/2000-RB dated May 3, 2000 as amended from time to time.

AD banks may make remittances upto USD 50,000 or its equivalent in a block of five calendar years, without the prior approval of the Reserve Bank, for purchase of foreign securities under the ADR / GDR linked ESOPs, after satisfying that the issuing company has followed the relevant guidelines of SEBI / Government.

(ii) In cases where an Indian party, after being successful in the bid / tender decides not to proceed further with the investment, AD banks should submit full details of remittance allowed towards EMD / invoked bid bond guarantee, to the Chief General Manager, Foreign Exchange Department, Central Office, Overseas Investment Division, Amar Building, 3^rd floor, Mumbai 400 001.

(iii) In case the Indian party is successful in the bid, but the terms and conditions of acquisition of a company outside India are not in conformity with the provisions of Regulations in Part I, or different from those for which approval under sub-regulation (3) was obtained, the Indian entity should obtain approval from the Reserve Bank by submitting form ODI.

The Indian party should report details of the disinvestment through the AD bank within 30 days of disinvestment in Part IV of the Form ODI as indicated in para 2 (c) above . Sale proceeds of shares / securities shall be repatriated to India immediately on receipt thereof and in any case not later than 90 days from the date of sale of the shares / securities.